market failure

The invaluable Warren Meyer at Coyote blog (one of my all time favs) has a great article up on protectionism and why its something we should be avoiding.

President Obama used a lot of his state of the union address again teeing up what sounded to me like a new round of protectionism. Protectionism is the worst form of crony capitalism, generally benefiting a handful of producers and their employee to the detriment of 300 million US consumers and any number of companies that use the protected product as an input.

The example he uses? Sugar. What industry does it protect and subsidize in the end? The producers of high fructose corn syrup (HFCS). And what does the government tell us about HFCS?

It’s bad for us. Sugar would be preferable.

So why do we continue to use it in place of sugar? Protectionism. Look at the chart he includes:

The chart says it all. With the tariff added, look at the average US cost of sugar vs. the world’s average cost.

When a tariff is involved, you’ve just moved out of the realm of real capitalism and into the realm of crony capitalism. This has nothing to do with markets failing. This has to do with the usual – government intrusion using their monopoly power of force which then distorts a market and causes users of the product whose price they chose to artificially inflate with a tariff to seek lower cost alternatives.

Remember, the same government that is claiming HFCS isn’t good for you is the one that’s also made it impossible to use a product that it claims is better for you (in relative terms of course):

Meyer:

For the last 10 years or so, HFCS-42 has actually traded at a price higher than the world market price for sugar, but lower than the US price for sugar. There is a lot complexity to prices, but this seems to imply that HFCS would not be nearly as attractive a substitute for sugar if US sugar tariffs did not exist (not to mention subsidies of corn which support HFCS). This can also be seen in the fact that HFCS has not been used nearly so often as a sugar substitute in markets outside of the US, even by the same manufacturers (like Coke) that pioneered its use in the US.

Or, if markets had been left alone, all indications are we’d be using lower cost sugar right now.

Meanwhile the government protects and subsidizes an industry that makes a product it says is worse for you .